In the UK, Monetary policy has been given to the Bank of England. Therefore, the Bank of England has independence in setting interest rates. The government only set the inflation target of 2% inflation.

If the MPC predict inflation will rise above the inflation target then they will increase interest rates. Higher interest rates reduce demand and prevent the economy expanding too fast.

If economic growth is sluggish, then interest rates can be cut, lower interest rates boost economic growth and help to reduce inflation.

Fiscal policy is not used so much in modern economies, but, in theory can be used to prevent recessions or prevent inflation.

If inflation is a problem the government can increase tax rates and cut spending. These will reduce Aggregate demand, and therefore, reduce inflationary pressure.

In a recession, the government can increase AD, by increasing government spending and cutting taxes. Lower taxes increase disposable income. This helps increase economic growth and reduce unemployment.